Job Market Paper
The Evolution of Liquidity Premia in Money Markets
This article investigates how liquidity premia in money markets have changed as the consequence of Basel III and Quantitative Easing (QE) since the financial crisis. I document two lasting singularities in money markets since 2009: (i) the liquidity premium on T-bills is now higher than the one on reserves, (ii) the supply of T-bills has become a strong predictor of short term interbank yields. I rationalize these facts in an asset pricing model with heterogeneous financial institutions differing in their access to reserves. The combination of large excess reserves (following QE) and the leverage ratio (following Basel III) creates a segmentation of money markets such that traditional banks cannot intermediate liquidity to shadow banks. As a consequence of this segmentation, the Fed becomes passive with respect to exogenous changes in T-bills supply.
(joint with Adrien d’Avernas and Matthieu Darracq Pariès)
This article investigates the efficiency of different monetary policies to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring heterogeneous banks subject to funding risk. When banks are well-capitalized, they have access to money markets and efficiently mitigate funding shocks. When bank capital is low, an endogenous haircut spiral between declining asset prices and funding risks arises. The central bank can partially counter these dynamics with monetary policies. Liquidity injection and discount window policies help alleviate stresses in the traditional banking sector but fail to reach to the shadow banking sector. Large-scale asset purchases (LSAP) decrease the stock of funding risks through a general equilibrium effect and therefore have a larger reach in the economy. If the shadow banking sector is large, LSAP may be necessary to stabilize asset prices.
This article was awarded the 2018 Distinguished CESifo Affiliate Award in Macro, Money and International Finance.
When Short Drives Long: Endogenous Risk, Innovation, and Hysteresis
(joint with Adrien d’Avernas, draft available on demand)
We propose a transmission mechanism from financial cycles to aggregate productivity growth. We provide a structural macroeconomic model with heterogeneous risk aversion and endogenous productivity growth in which the financial sector is key in screening and absorbing innovation risk. Shocks to innovation levels and volatility generate financial cycles. During financial stresses, the financial sector becomes undercapitalized and reduces its exposure to innovation risk. As a consequence, the willingness to take risks in the economy is reduced, and less innovation occurs. Using a large database on the U.S. financial sector from 1973 to 2014, we show that the combination of undercapitalization and heightened uncertainty generate large time-varying risk premia, safe asset shortage, and hysteresis in productivity growth following financial crises that are quantitatively consistent with empirical observations. We derive macro-prudential policy implications of the arising trade-off between short-run growth and financial stability.
(joint with Adrien d’Avernas)
We propose a robust method for solving a wide class of continuous-time dynamic general equilibrium models. We rely on a finite-difference scheme to solve systems of partial differential equations with several endogenous state variables. This class of models includes the frameworks (among others) of He and Krishnamurthy (2013); Silva (2015); Brunnermeier and Sannikov (2014); and Di Tella (2016).